[Reuters] - The WHO's cancer arm, the International Agency for Research on Cancer (IARC), said glyphosate, the active ingredient in the Monsanto Co herbicide Roundup, was "classified as probably carcinogenic to humans". Monsanto, the world's...

In a report published Monday, UBS analysts maintained a Buy rating on Monsanto Company (NYSE: MON), while reducing the price target from $133 to $131.
In the report, UBS noted, "MON & petchems have had minimal F/X since corn & oil are USD-based...

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Monsanto Company (NYSE: MON) is the world's largest provider of patented genetically modified seeds for crops such as corn, soybeans, and cotton, bringing in $10.5 billion this past year.[1] Monsanto is also the inventor of Round-Up, the first commercial glyphosate herbicide (weed-killer), and SmartStax, a seed that will require 70% less pesticide and increase whole-farm yields by 5-10%.[2] The Round-Up patent has expired, so now Monsanto faces increasing competition in its chemical business. Due to heightening competition in its pesticide business, Monsanto has shifted its strategy towards seed development.

Anything that makes food more expensive benefits Monsanto, because it encourages genetically engineered crops. Crops become more expensive due to droughts, developing economies eating more meat, and demand for bio-fuels increasing because of high oil prices. Though Monsanto took a hit with the economic downturn, analysts say that it is primed for a come back, noting the strength of the market and the need for such seeds.[3]

Business Overview

Business Financials

Monsanto's products fall into two main categories: Chemicals (Round Up, and Other Chemicals) and Seeds and Traits (Corn, Soybean, Cotton, Vegetable Seeds and Genetic Traits).

Chemicals (33.4% of Gross Profit)

The chemical sector, termed Agricultural Improvement by Monsanto, includes a variety of herbicides and lawn/turf treatments that Monsanto sells to farmers and gardeners to help improve their yields and comprised 33.4% of Monsanto's gross profit.[4]

Seeds and Traits (66.6% of Gross Profit)

Monsanto is a leading marketer of genetically modified corn, cotton, soybean, and canola seeds. It develops genetic traits for plants such as weed resistance, or herbicide resistance that are extremely useful for increasing yields. Farmers want to increase yields when food prices are high and precipitation is low, which is when Monsanto has historically thrived most. Seeds and Traits sales have accounted for two-thirds of Monsanto's gross profit.[4]

Over time, Monsanto's business has been increasingly reliant on corn. The development of ethanol spurred demand to increase yields, and therefore to buy special Monsanto seeds. A typical US car entirely powered by ethanol for 1 year would consume enough corn to feed 7 people for an entire year. It takes about 21 pounds of corn to produce 1 gallon of ethanol.[6] Higher gas prices have increased demand for the fuel.

Quarterly and Annual Earnings

Q2 FY 2011 Quarterly Earnings

Monsanto posted $4.1 billion in net sales for the second quarter of 2011, as compared to $3.9 billion in net sales in year ago results, an increase of 6 percent.[7] These gains were driven primarily by increases in corn seed and traits sales as well as agricultural productivity.[7] The former increased from $2.2 billion in the second quarter of 2010 to $2.4 billion in the second quarter of 2011; similarly, agricultural productivity increased from $642 million in the second quarter of 2010 to $708 million in the second quarter of 2011.[7] Profits similarly increased by 10% in the second quarter of 2011 when compared to year ago results, totaling $2.3 billion for the quarter as compared to $2.1 billion last year.[7] Net income attributable to Monsanto increased from $887 million in Q2 FY 2010 to $1.017 billion in Q2 FY 2011.[7]

Q1 FY 2011 Quarterly Earnings

Monsanto posted net sales of $1.8 billion for the first quarter of 2011, an 8% increase from net sales in 2010.[8] Gross profit similarly increased by 11%, totaling $818 million for the quarter compared to $739 million in year-ago results[8] These profit gains were driven primarily by increased profitability in Monsanto's Seeds & Genomics segment, which increased its profit by 14% for the year.[8] Net income totaled $6 million for the quarter, increased by $25 million in year-ago results.[8]

FY 2010 Annual Earnings

Monsanto posted gains across the board for the fourth quarter of 2010; gains for the year, however, were mixed.[9] Total net sales increased from $1.879 billion in the fourth quarter of 2009 to $1.953 billion in the fourth quarter of 2010.[9] Total net sales for 2010, however, decreased from $11.7 billion to $10.5 billion.[9] Gross profit for the fourth quarter increased to $861 million from $857 million the previous year.[9] Gross profit for the year decreased from $6.8 billion to $5.1 billion.[9] Operating expenses, however, decreased for both the quarter as well as the fiscal year.[9] Q4 operating expenses decreased from $1.10 billion to $1.05 billion while annual operating expenses decreased to $3.47 billion from $3.66 billion.[9]

Driving quarterly gains were improvements in net sales in the corn seed and traits segment as well as the soybean and cotton seed segment.[9] These segments also grew over the entire course of the 2010 fiscal year.[9] Net sales from roundup decreased over the course of the year from $3.5 billion to $2.0 billion.[9]

Trends and Forces

Increasing Gas Prices Positively Impacts Monsanto's Earnings

Ethanol in the U.S. is produced from corn, one of the most fertilizer and nitrogen intensive crops. [10] Demand for Ethanol and biofuels increases with higher gas prices. People only consume biofuels, it seems, when gas prices are extremely high.

Assuming corn and soy biofuels remain the primary alternative energy prospect, if petroleum prices go up, demand for both corn and soy biofuel will increase. If Ethanol wins out, Monsanto will benefit the most. If soy biodiesel wins out, Monsanto will still benefit. If oil prices stay low, Monsanto will suffer because farmers may not need to increase their yields.

World Food Crisis Positively Impact Monsanto's Sales

High food prices, and moderate drought conditions will improve demand for Monsanto's yield increasing products. Severe drought conditions will disrupt demand for Monsanto's seed and fertilizer because it is pointless to tend to dead fields (think: Grapes of Wrath). Low food prices, and great weather will decrease demand for Mosaic's fertilizers.

High food prices, and moderate drought conditions will improve demand for the Monsanto's products. Severe drought conditions will disrupt demand for Monsanto's seed and fertilizer because it is pointless to fertilize dead fields. Low food prices, and great weather will decrease demand for Monsanto's seed because farmers will not need artificial assistance.

Reduction in Arable Land Increases Demand for Fertilizer

The amount of arable land worldwide is dwindling. The population boom has cut the amount of arable land per person in half over the past 50 years.[10] As population and personal incomes in developing regions of the world increase, the worldwide demand for food also has increased. Worldwide population has grown 12% in the past ten years, while farm acreage has grown only 2%.[11]

Brazil, China, and India are three of the five most populous countries and are trying to meet the growing demand for food, fuel, and feed for livestock. Brazil, China, and India each have just 7%, 15%, and 49% of arable farmland, respectively,[12] and with their respective populations on the rise, these countries need to make the most of the arable land they have. In addition, weather factors such as temperature, rain, floods, droughts, and hurricanes destroy arable land for a particular crop season and render land unusable for a few seasons.

Reduction in arable land should increase the demand for yield-increasing fertilizers in the long run and benefit Monsanto. In the short run, however, violent destruction of arable land through natural disasters could disrupt Monsanto's contracts (farms often buy seeds on credit) and damage the company's profitability.

Competition

Although Monsanto is in many ways the industry leader, it faces stiff and rising competition from chemicals giant DuPont and seed and agrochemical company Syngenta AG (SYT). DuPont could prove to be an especially significant threat, with its comparable market share but dramatically different approach to the future alternative fuels market. By casting its R&D "net" as widely as possible, DuPont has set itself up to take the lead in seed sales and technology if corn-based ethanol fails.